A preferred stock will pay a dividend of $7.50 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Question

Quizplus · Accepted Answer

The constant growth Dividend Discount Model (DDM) formula, when dividends are not expected to grow (g = 0), simplifies to D/R, where D is the dividend and R is the required rate of return. Here, D = $7.50 and R = 10% or 0.10. Thus, the intrinsic value = $7.50 / 0.10 = $75. None of the provided options match this calculation.

A Preferred Stock Will Pay a Dividend of $7